The iron ore price could be about to head south if China's imports are anything to go by.
China's imports of iron ore have fallen for the second consecutive month, with May imports sinking 12% compared to April to 70.9 million tonnes, according to Bloomberg. Adjusting for the number of days in the month, May imports were the lowest since November 2014.
Surprisingly, the iron ore price has rallied over the past month after hitting a 10-year low in April. Spot iron ore fell to US$478.08 a tonne in early April but has recovered to trade at US$64.34 a tonne on Monday.
But much of that rally has been attributed to record falls in stockpiles of iron ore at Chinese ports. As a result, a number of investment banks are forecasting the rally to fizz out and spot iron ore prices to sink once again. Goldman Sachs is forecasting prices below US$50 a tonne.
The falling price and lower Chinese imports holds a double blow for Australia's economy. In recent months, the declining iron ore price has been offset by a jump in exports, but that trend is unlikely to continue. Australia shipped 31.7 million tonnes of iron ore to China in May, up from 30.3 million in April. In April 2014, Australia shipped 28.9 million tonnes to China, and we could see exports fall to those levels in the near future.
For junior Australian iron ore miners, falling prices and demand represent a major dilemma. Atlas Iron Limited (ASX: AGO) has managed to work out a plan to continue mining by offering its contractors including transport group McAleese Ltd (ASX: MCS) and Maca Ltd (ASX: MLD) profit sharing arrangements, to lower its cost of production. The company has also received a royalty holiday from the Western Australian government, at some stage Atlas will need to find the means to pay royalties in future.
But those measures are short term in nature.
And as I wrote late last month, iron ore supply is still increasing, with the major iron ore producers including Brazil's Vale, Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) virtually doubling their production since 2007.
China's steel production is declining, which is likely to reduce demand for iron ore, as the giant economy transforms from one driven by industrial and infrastructure development into one more driven by domestic consumption.
Without more high-cost iron ore producers exiting the market, iron ore prices are likely to come under significant pressure in the months ahead. That may be one of the primary reasons why Fortescue Metals is reportedly seeking to sell stakes in some of its mines. According to Bloomberg, Fortescue could sell as much as a 20% holding in some assets, to offset its US$7.4 billion in net debt and slash its interest expense.
Foolish takeaway
Junior iron ore miners who have breathed a sigh of relief over the past two months may be about to take another hit. Let's hope they are prepared for it.
